Stronger US Data Cools Rate Cut Expectations
August data confirmed that consumer spending rose 0.6%, slightly above forecasts, while the Fed’s preferred inflation gauge—the core PCE—rose 0.2% month-over-month and 2.9% annually. Both readings were in line with expectations, but continued signs of economic strength are giving the Fed less room to ease.
Third-quarter GDP was revised higher to 3.8% annualized growth, beating estimates of 3.3%, reinforcing the narrative of persistent strength across consumer and business sectors. Weekly jobless claims also surprised to the downside, falling to 218,000 versus expectations of 235,000, adding to the labor market’s staying power.
Dollar Finds Ground Despite Friday Dip
The DXY settled the week lower by 0.27% at 98.182, yet booked a second weekly gain. USD/JPY closed at 149.47—still hovering near its highest since early August and marking its fifth straight week of gains. The dollar also firmed against the Swiss franc, closing at 0.7982 for its first weekly win after six consecutive losses. EUR/USD, however, climbed 0.29% Friday to $1.17002 but posted its first weekly drop after three straight gains.
Fed Messaging Sends Mixed Signals
Fed commentary added some complexity. Richmond Fed President Thomas Barkin said risks to inflation or unemployment remain limited, suggesting the Fed could keep a balanced stance. Conversely, Fed Vice Chair for Supervision Michelle Bowman noted that while inflation is nearing target, decisive cuts may be needed soon to protect jobs.
Market pricing still reflects a high probability—around 89.8%—of a 25-basis-point cut at the next Fed meeting, down slightly from nearly 92% the previous week. That modest pullback in expectations helped keep the dollar buoyed.
Yields Reflect Rate Uncertainty
In Treasuries, the 2-year yield—often most sensitive to rate expectations—fell about 2 basis points to 3.645%, while the 10-year yield held near 4.18%. The soft move in yields matches the market’s current uncertainty over timing and pace of cuts, especially with core inflation still sitting above the Fed’s 2% goal.